Prime Healthcare founder Prem Reddy talks to the press outside of West Anaheim Medical Center in this file photo. Orange County Register

The Prime Healthcare Services hospital chain has acknowledged that it is the target of two federal investigations: a U.S. Justice Department probe of its Medicare billings and an inquiry into alleged violations of patient confidentiality laws.

The San Bernardino County-based company disclosed the investigations in a Jan. 2 filing with the state health department in Rhode Island, where Prime hopes to buy its 22nd hospital. Prime Healthcare also owns Garden Grove Hospital, La Palma Intercommunity, West Anaheim Medical Center and Huntington Beach Hospital.

Prime's filing marked the first time the company has said it is facing a federal investigation. Until now, the company has steadfastly denied being the subject of any such probes.

Prime claims its Medicare billings are legal and proper, and the company shows little sign of backing away from the kind of aggressive billing practices that have made it the focus of official scrutiny.

As California Watch has reported, Prime hospitals have billed Medicare for treating extremely high rates of some difficult medical conditions, including septicemia, or blood poisoning, and kwashiorkor, a form of malnutrition seen among children in African famines. The billings have made Prime eligible for millions of dollars in Medicare bonus payments, according to federal records.

In June, the Justice Department subpoenaed documents concerning Prime's billings for septicemia and malnutrition, the company said in the Rhode Island filing.

In a letter in response to California Watch's request for comment, Prime lawyer Anthony Glassman said the company had been targeted for federal investigation because of "false allegations" made by the Service Employees International Union, which represents many Prime workers and has butted heads with the company over labor contracts.

Prime also said it is being investigated by the U.S. Department of Health and Human Services' Office for Civil Rights. That probe concerns Prime's 2011 disclosure of the medical files of a patient who was treated for complications of diabetes at a Prime hospital in Redding.

MEDICARE BONUS PAYMENT

Federal records show Prime obtained a Medicare bonus payment of more than $6,000 after reporting it had treated the patient for kwashiorkor, a form of malnutrition that usually afflicts children in sub-Saharan Africa.

Over two years, the hospital claimed to have treated more than 1,000 Medicare patients for the ailment, records show – a rate more than 60 times the state average.

In an interview with California Watch, the patient denied being malnourished and said she was never treated for kwashiorkor. In an attempt to rebut a California Watch news story about the issue, Prime officials shared the patient's medical files with the local newspaper and with hundreds of hospital employees, records show.

In November, California regulators fined Prime $95,000 for violating state confidentiality laws in the case. Disclosing a patient's medical records without consent also violates federal law. The chain denies wrongdoing and is confident it will win on appeal, wrote Glassman, Prime's lawyer. He also contended that the SEIU had urged the patient to complain about her diagnosis.

As late as last March, Prime said it was unaware of any federal probes. In 2011, it threatened to sue California Watch for defamation for reporting that the company was facing a federal probe. Prime threatened to sue because the company did not yet know it was "being unfairly targeted by government agencies," Glassman wrote.

Prime's disclosure about the investigation was attached to its application to buy Landmark Medical Center, a 214-bed hospital in the Rhode Island town of Woonsocket. The filing was marked confidential, but it can be downloaded from the health department's website.

RECORDING OF PRESENTATION

Soon after Prime made the filing in Rhode Island, the company's founder gave a presentation to doctors at a south Texas hospital that Prime's nonprofit foundation recently acquired. A person who was present made a one-hour recording of the session and shared it with California Watch.

According to the recording, Dr. Prem Reddy, Prime's CEO and the foundation's president, told the doctors how to boost the hospital's Medicare payouts by employing some of the same billing strategies now being investigated.

In the meeting at Knapp Medical Center in Weslaco, Texas, Reddy encouraged the doctors to augment their patients' charts with multiple secondary diagnoses that would qualify for Medicare treatment bonus payments.

Reddy also urged the doctors to find reasons to admit Medicare patients to the hospital rather than treating them as outpatients, saying the Medicare payouts would triple.

Reddy told the Texas doctors that Medicare's billing rules were a game "devised by bureaucrats." Physicians need to "understand the rules of the game and improve our scores," he said.

Also in the session, Reddy said Medicare had never successfully challenged a Prime billing, saying the company appeals whenever a billing is rejected.

"We never lose a case yet," Reddy said. "We fight on every case and we win."

In his letter, Glassman wrote that Reddy's presentation "focused on complex clinical information," including "evolving Medicare reimbursement models for physicians and hospitals."

"Dr. Reddy was not instructing his doctors on methods for cheating Medicare," the lawyer wrote.

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